Shareholders in Amazon (NASDAQ: AMZN) have grown used to the online giant delivering quickly – including share price growth. The Amazon share price has more than quadrupled in the past four years. So the past year’s increase of 8% looks unimpressive in comparison. Over the past month, the Amazon share price had shed around 10%.
Could it keep falling?
Amazon share price drivers
First, let’s consider why the Amazon share price has started to head south.
The departure of founder Jeff Bezos as CEO last month was well signposted. After more than two decades running the online retailer he set up, it was no surprise that Bezos decided to pass the reins onto someone else. I think the change caused some concern that without Bezos’ hands on the wheel, the company might struggle to maintain historic growth rates.
However, Amazon is now a massive and very well-oiled machine. With 1.3m employees globally, it has an enormous talent pool as well as established business model. While Bezos performed brilliantly, much of that was down to assembling a high-quality team around him. I don’t think executive succession necessarily means we ought to expect less from Amazon.
Another thing that hit the Amazon share price was the company’s revenues for the second quarter falling short of Wall Street estimates. But they did match the company guidance. Sales growth of 27% versus last year would still be envied by most companies.
Why I’m bullish on Amazon
The law of large numbers suggests that growth will become increasingly hard to find for Amazon, which had $386bn of revenue last year. But the company continues to expand its business. Amazon Web Services is just one of the company divisions I think could actually accelerate sales growth in coming years.
Last year’s earnings per share were the highest ever. That suggests the company is getting better at converting mammoth revenues into profits. Such profit margin improvements could improve earnings, even without sales growth. The shares trade on a price-to-earnings ratio of 80. That is high. But if the company maintains its proven ability to grow earnings, I reckon today’s Amazon share price could still be a good entry opportunity.
I don’t think most competitors could replicate the Amazon ecosystem. That gives the company huge pricing power. I expect demand in its markets, such as online shopping and web hosting, to keep growing in coming years. I also think Amazon’s installed customer base gives it an enormous competitive advantage. In short, I expect Amazon to do well in the coming years. If it does, I expect the Amazon share price to follow, even if there are a few bumps along the way.
Amazon share price risks
That’s not to say that it will all be plain sailing. Time will tell whether Bezos really did have the golden touch. Weaker executive performance under the new CEO is a risk.
As this business juggernaut grows further, there is growing risk that regulators could try to break it up. I also think any serious earnings miss could dent confidence in the growth story and send the Amazon share price tumbling afresh.
Such risks could lead to the share price falling further. However, I think the prospects for Amazon in the longer term remain attractive. I would consider using price weakness to add Amazon to my portfolio.
